Directors step up loans to small UK construction firms to plug gap

(Reuters) - The directors of small British construction businesses are lending them more money to plug a funding gap as banks set tighter lending criteria and major contractors delay payments, a survey showed on Monday.

Workers construct residential homes at a building site in north London September 6, 2012. REUTERS/Neil Hall

Directors lent the companies 38 million pounds in 2015/16, up from 29.7 million pounds in 2013/14, said online finance market Funding Options, which surveyed electricians, plumbers, plasterers, carpenters, decorators, scaffolders and roofing businesses.

Banks have taken a more cautious approach on funding given a slowdown in UK property markets and tighter scrutiny from regulators, and are instead choosing to focus on larger players.

“Confronted by continued borrowing constraints and often faced by long waits for payment, they (directors) are ploughing significant amounts of their own money into their businesses to ensure they remain on a firm financial footing,” Funding Options CEO Conrad Ford said.

“But it is questionable whether taking such drastic personal measures is sustainable for much longer.”

Subcontractors that fail to find funding solutions could face insolvency, with the industry often requiring significant upfront cash payments to be made for materials and labour.

Most recently, troubles at large builder Carillion (CLLN.L), a key government supplier that will work on the large HS2 rail contract, have highlighted the risk subcontractors face.

Last month, the group booked an 845 million pound writedown and warned on profit, and analysts have since pointing out that it owes 800 million pounds in the form of payables to clients and suppliers, 75 percent higher than the sector average.

Over 1 billion pounds of cash is held back by Britain’s top construction companies from their small- and medium-sized contractors, according to the Specialist Engineering Contractors’ Group.

SEC, an industry body that represents about 60,000 companies, has written to the government requesting the creation of project bank accounts - or ring-fenced accounts to protect payments on running construction projects.

Funding Options said a slowdown in the property market was likely to make it even harder for subcontractors to secure lending from banks, which made losses on construction loans during the financial crisis as many groups closed shop.

Growth in Britain’s construction industry fell to an 11-month low in July, as a weakening economy and political uncertainty deterred new orders, the Markit/CIPS UK Construction Purchasing Managers’ Index showed.